Abstract

This study examines the impact of CEO compensation on banks’ risk during both pre and post-financial crisis periods. Our results suggest a negative relationship between CEO bonuses and banks’ risk in the pre-financial crisis period. Similarly, restricted shares and options granted to CEOs in the post-financial crisis period also appear to decrease banks’ risk. In contrast, we observe a positive influence of the Troubled Asset Relief Program
(TARP) on banks’ risk. Our results also show that the length of time to maturity of options influences banks’ risk-taking behavior. Our findings have useful implications for
formulating and regulating CEO compensation structure.